The Government's approach to reducing red tape and improving transparency

The Small Business, Enterprise and Employment Bill 2014-15

The Small Business, Enterprise and Employment Bill 2014-15 (the Bill) was announced in the 2014 Queen's Speech as part of the Government’s drive to:

reduce red tape;

reform parts of the UK’s insolvency and restructuring regimes;

create greater transparency in ownership structures; and

improve the access to funding for SMEs.

The Bill is currently going through Parliament and it is intended that it will receive Royal Assent before the next general election.

Ownership of companies

The issue of ownership of companies has come under significant public scrutiny over the past few years.

The Bill is intended to deter persons from hiding their interests or the control they exercise over a company, and will require a company to identify people who have “significant control” (broadly these are people who alone or together hold more than 25% of the voting rights or right to appoint or control the majority of the board of directors). Companies will also have to keep a publically available register of those people.

This will create a proactive disclosure obligation on the company with financial consequences for those that fail to comply. Restrictions can also be placed on the shares of a person with significant control and in certain circumstances, a mandatory transfer of their shares.

Directors

A particular focus of the Bill is to ensure that the public are adequately protected from delinquent directors. The Bill will allow the directors’ disqualification regime to take into account a director’s overseas misconduct, and also allow for the court to order the director to compensate an individual where they have suffered identifiable loss as a result of the director’s actions.

Shadow directors will also now be expressly subject to the general duties to which directors are subject.

Access to finance

Since 2008, gaining access to finance has been a common issue faced by SMEs.

Particular emphasis has been given in the Bill to asset finance and specifically, receivables finance and the issue of restrictions on assignments is trade contracts. The Bill will enable the Secretary of State to make regulations to make such prohibitions void, or place conditions on the enforceability of such prohibitions.

The Bill also seeks to ensure that financial institutions share relevant data with credit referencing agencies (where the SME has provided consent). The intention being that this information will enable other lenders to undertaken accurate risk assessments and open the SME market to greater competition.

Restructuring and insolvency

The Bill proposes a significant number of changes to the current regime.

The use of “pre-pack” sales (where the business and assets are sold immediately on the appointment of an administrator without reference to creditors) has been subject to a significant amount of publicity and criticism where the sale is back to the existing management.

The Bill will create a reserved power for five years for the Secretary of State, to create regulations to deal with administration sales back to connected persons without the prior consent of the creditors. Readers may be aware that this element is taken from the recommendations of Teresa Graham CBE in her report on pre-pack administration sales.

The Bill also seeks to minimise the compliance costs in circumstances where it is of no benefit to the creditors, by cutting through the large amount of statutory requirements that apply.

At present, there are certain claims that only an officeholder can bring and those claims cannot be assigned to a third party. There is a well-established market for litigation funding, but there are circumstances where an officeholder is unwilling/unable to bring the claim but unable to assign to a third party.

The Bill will enable an officeholder (for corporate appointments) to assign such claims to third parties. This is likely to build on the existing funding marketplace and deliver additional returns for creditors.

Summary

The Bill contains some interesting ideas to address some of the issues that arise in a number of areas, but it does create a number of questions which are yet to be addressed. Whilst it is commendable that the Government is seeking to address these issues, it is worth bearing in mind that the detail on the implementation of the principles of the Bill is still lacking and will be dealt with by way of statutory instruments if and when enacted.

As a result, the actual effect of the Bill is still to be decided.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Business Restructuring

Understanding the fundamentals needed to achieve the turnaround of a troubled business and maximise recovery for all stakeholders is essential to protect value, whether that means its brand, reputation, intellectual property or other tangible assets.

Gavin Jones

Partner - Head of Business Restructuring

I act for banks and asset based lenders, insolvency accountants and boards of directors in relation to both formal and informal insolvency procedures, turnaround and restructuring and in relation to security issues.